OPEC cutbacks leave markets unimpressed

OPEC yesterday agreed to slash 2.2 million barrels from its daily production – its single largest cut ever – while bloc outsiders Russia and Azerbaijan announced their own cutbacks of hundreds of thousands of barrels from the market.

It was the third time producers reduced their output in as many months. Since September, members of the Organization of the Petroleum Exporting Countries have pledged cuts totaling 4.2 million barrels a day, or nearly 12 percent of their capacity, a record in such a short time.

“I hope we surprised you,” OPEC President Chekib Khelil said when asked whether the size of the cut would shock moribund oil markets into an upward trend. “If you're not surprised we need to do something about it.”

And yet markets weren't impressed.

Crude oil sank to $40.20 after the announcement, a level not seen since the summer of 2004 and a clear sign investors are more worried that the world is heading for a long and painful recession in which energy use will continue to erode.

Gasoline prices have been plunging right behind crude, providing a bit of economic cover for almost everyone. Yet crude has fallen so far, so fast, there is growing alarm that consumers are being set up for a price shock.

OPEC's latest cut is likely to curtail, at least somewhat, the ongoing decline in gasoline and heating oil prices, said Peter Beutel, an oil analyst at Cameron Hanover.

What OPEC is trying to do, Beutel said, is “slowly dry up a pool of available crude oil and, ultimately, it will mean higher prices.”

By Memorial Day, he said, gasoline could be from 50 cents to $1 a gallon higher than current levels.

OPEC was unable to tamp down soaring oil prices over the summer, which hit a record of more than $145 a barrel in July, and it has been unable to stop crude on the way down. The problem confronting OPEC is that demand rather than supply has been ruling the market.

The price of oil is closely tied with the buying habits of Americans, who are now hunkering down for the worst recession in at least a generation.

At the same time, consumers had been changing their traveling habits in the wake of higher fuel prices and environmental concerns. The government reported last week that between November 2007 and October, Americans drove 100 billion fewer miles.

Khelil said OPEC wanted to eliminate an overhang of commercial oil inventories, which now stand at 57 days of supplies, down to 52 days, and aimed to push up prices to $70 to $80 a barrel.

OPEC noted in its statement that “crude volumes entering the market remain well in excess of actual demand.”

“Moreover, the impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices,” it said.

The group said “if unchecked, prices could fall to levels which would place in jeopardy the investments required to guarantee adequate energy supplies in the medium to long term.”